After a chaotic year of one-sided inflation and frantic price cuts, retail chains are trying to return to something akin to normal. But recent earnings reports show there’s still plenty of room for non-grocery products to stay on the discount rack.
Many large retailers have put a big dent in the mountains of clothing and stacks of electronics they accumulated last year that they couldn’t sell after twisted supply chains spread product shipments and rising prices made many shoppers more need-oriented. Inventories for the most recent quarter were down, or at least flat, at chains like Target Corp. TGT,
Walmart Inc WMT,
and Macy’s Inc. M,
compared to where they stood at the end of 2021.
But some analysts have said retail inventories are still high overall and signals from executives are still mixed.
John Rainey, Walmart’s chief financial officer, was optimistic, saying, “I have a feeling this year will be a more normal environment for price cuts — or certainly more normal than last year,” during the big-box chain’s earnings call. month .
Executives at Target, which is more exposed to the vagaries of discretionary shopping, were not so optimistic. They said last week they expect “a more promotional environment” going forward and were “more cautious” about bringing discretionary items — or things that aren’t groceries, for example — to store shelves. The chain also planned to roll out lower-priced items, including private label brands.
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Jeff Gennette, Macy’s chief executive, agreed, saying, “We believe discretionary spending will come under pressure at all income levels,” with essentials sucking up spending as shoppers struggle to access credits. cards to pay back and sour debt levels rise.
Other retailers are still trying to adjust their inventories, including at Kohl’s Corp. KSS,
where inventories were still up 4%. While that’s a much smaller increase than in previous quarters, executives also said they expected discounts from rivals to “remain competitive.” Stocks also rose at Burlington Stores Inc. BURL,
though executives there said the increase was intentional after the off-price chain ran out of inventory.
Other analysts have noted that stocks remain generally inflated, suggesting a longer runway for customers looking for discounts.
“We note that some management teams within our coverage that have already reported Q4 results have suggested that industry promotions may take longer in FY23 than initially thought,” Cowen analyst John Kernan said in a research note last month. “Inventory dollars across the industry have peaked over the past four years, reflecting a steady build-up from the lows that occurred early in the COVID-19 pandemic.”
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Heading into this year, analysts said retailers were not preparing for a recession. Edward Jones analyst Brian Yarbrough said in an interview that none of the chains he follows have indicated a sudden, sharp turn in that attitude.
“No one has raised a red flag like ‘Hey, we’re really worried, we’re seeing a huge shift in consumer spending or a big slowdown’ or anything like that,” he said.
“They feel it’s better to err on the side of caution, be low on supplies and try to hunt when things get better,” he continued. “But I think most of them want to avoid the situation they got into last year where there was just way too much inventory.”
The sharp turnaround in consumer demand last year surprised retailers. The 2021 stimulus faded, a knotted supply chain still kept shipping costs higher, and the Russian invasion of Ukraine drove up food costs. Customers, increasingly forced to choose between needs and wants, trained how much purchasing power they had for the things they needed – like groceries and heating – or for things they hadn’t done in a while, like travel and concerts.
That left retailers with tons of toys, laptops, pants and shirts that no one wanted — after a burst of demand while pandemic restrictions were still in place. Shares fell. Retail chains had to lower the prices of those items to retain consumer interest and eliminate bloated inventories.
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Those effects have disproportionately affected low-income shoppers. Barbara Rentler, CEO at discount retailer Ross Stores Inc. ROST,
said the higher cost of living “continues to impact our low-to-middle-income customer” and said it was “cautious to remain conservative in planning our business.”
“At the same time, the higher-income consumer is also looking for value,” Cowen analyst Oliver Chen said. “And you see that with higher income share gains at Walmart and even at Costco COST,
Some retailers have tried to turn the year into a positive spin. Burlington executives said any economic slowdown would “create a greater consumer focus on value, potentially leading to trade-offs from middle and upper income groups.” And after the electronics boom and bust of the pandemic, executives at Best Buy Co. Inc. BBY,
cited the need for electronics upgrades and replacements — and broader technical innovations — as potential sales drivers.
Some stores are embracing a world of cheaper goods to some extent. Nordstrom Inc. JWN,
executives announced last week that the retailer was pulling out of Canada, but opening several more bargain-oriented Rack stores to lure in customers. As with Target, Macy’s executives said they would “refresh, reimagine and replace” private label products over the next three years.
Retailers can sell their own brands at a lower price because they can get them for a lower price, Yarbrough notes. That is different from, for example, Levi Strauss & Co.’s LEVI,
jeans, which a retailer would buy from Levi’s at a markup and then make a markup himself. But he said there was always a risk of leaning too deeply into private label general merchandise.
“People come to the store for brands,” he said. “That’s how you drive people.”
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